SINGAPORE: Asia-Pacific oil and gas (O&G) companies may have to make tough decisions if the fall in oil prices is prolonged, according to a Standard and Poor's Ratings Services report on Wednesday.
In a report titled, "Another Decline In Oil Prices Could Have Asia-Pacific Oil And Gas Companies Over A Barrel," S&P credit analyst Mehul Sukkawala said: "The ratings on 40% of the O&G companies we rate in the Asia-Pacific and 60% of the stand-alone credit profiles will face downward pressure if oil prices fall 10% to below US$50 per barrel without any signs of recovery."
Overall, he said, the ratings on Chinese state-owned enterprises and Australian companies are the most vulnerable, while the stand-alone credit profiles of the government-owned companies in countries such as Indonesia and South Korea are at the greatest risk.
The report said O&G companies in the Asia-Pacific are still better off than those in regions where the energy sector has been a significant contributor to higher default rates. This is mainly because the Asia-Pacific energy companies that S&P's rates are generally large, have good financial positions despite the low oil prices, and benefit from close strategic relationships with their respective sovereigns.
S&P has forecast oil prices at US$55 in 2016, US$65 in 2017, and US$70 in 2018 and beyond.
Sukkawala said if the oil price outlook worsens, Asia-Pacific O&G companies will need to reassess projects, weigh returns, prioritise investments, and review shareholder distributions.
He said defending creditworthiness in a tough environment will call for some difficult decision-making, particularly at the government-owned companies that dominate the sector.
The leverage of Asia-Pacific O&G companies is significantly higher than envisaged 12 months ago.
S&P said ongoing capital expenditure amid declining profitability has weakened the average debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortisation) ratio.
S&P's EBITDA expectation has fallen more than 40% for 2015 compared to when oil was over US$100 per barrel, whereas capital expenditure has fallen by only about 15%.
Government ownership of many energy companies in the Asia-Pacific is largely responsible for the less-than-warranted cut in capital spending.
Oil prices and capital expenditure will continue to determine the cash flows and leverage of energy companies in the Asia-Pacific.
At the same time, other factors such as shareholder distributions, acquisitions, and equity raising also have some influence on leverage and more importantly, on the level of cash flow deficit. - Bernama
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